Unrests in Greece and Spain Drag Euro Zone Markets 2%

Arthi Gupta
26 Sep, 2012
New York City

The European indexes dropped more than 2% as politicians face street protests. Italy raised

[R]2:30 PM Frankfurt – The European indexes dropped more than 2% as politicians face street protests. Italy raised €9 billion in a bond auction at lower yields and a rating agency cut euro zone outlook. French confidence eased and the UK retail sales rose in September.[/R]

European markets declined as protests turned violent in Madrid and Athens faces its first wave new protests after the appointment of a new coalition government.

The tensions on the streets and among political leaders are spilling over in the bond markets and the Spanish benchmark bond yield approached 6% and Italian bonds were under pressure too.

Separately, German government ratified the permanent bailout fund or the European Stability Mechanism after the highest constitutional court approved the German participation in the fund with few conditions last month.

Standard & Poor''s revised its estimate for the euro area economy to shrink 0.8% compared to the estimate of 0.7% contraction in July.

For 2013, S&P sees flat growth in the euro zone compared to the 0.3% growth predicted in July. The Spanish economy is estimated to contract 1.4% next year, from the 0.6% contraction estimated in July.

Separately, the Bank of Spain said in its monthly economic bulletin that gross domestic product is falling in the third quarter at a significant pace in an environment in which financial stress remained high.

Spain''s Economy Minister Luis de Guindos said on Saturday that he expected the economy to contract 0.4% in the July-to-September quarter.

Finance Minister and Prime Minister Mariano Rajoy are working with the leaders of troika in negotiating the details of larger bailout as the bond yields approach 6%. According to 123jump.com sources at the IMF and European Central Bank, Spain may be forced to seek a bailout of as much as €300 billion before the end of the year.

To add to Spain’s woes, the prosperous region Catalonia is scheduling elections for November and asking in a referendum to separate from the country.

Last month, Catalonia formally requested a €5 billion bailout from the government to restore economic growth. Catalonia is the third Spanish region after Valencia and Murcia to seek financial aid.

Separately, in Greece, people are protesting for the first time against the newly appointed coalition government for the first time in June.

The Greek Finance Minister Yannis Stournaras told Reuters that the country needs an additional €13 billion to €15 billion if the country were given a two-year extension of its bailout program.

He, however, said that the funding gap could be filled without further financial assistance from the euro zone.

In Paris trading, the CAC-40 Index declined 80.39 or 2.3% to 3,433.72 and in Frankfurt the DAX Index edged lower 131.16 or 1.8% to 7,294.04.

The yields on Spain’s benchmark 10-year rose 25 basis points to 6%. Italian 10-year yields rose six basis points to 5.16%.

Italian Bond Auction

Italy sold €9 billion of its 181-day bills at lower borrowing costs.

The average yield on the 6-month paper fell to 1.503% from 1.585% at the previous sale on August 29. The yield was the lowest since March. However, the bid-to-cover ratio, which reflects investor demand, slid to 1.39 from 1.69 in August.

German Bond Auction

Germany received bids for only €3.951 billion at an auction of the country''s September 2022 bonds today, the Bundesbank data showed.

The average yield rose to 1.52% compared with 1.42% on September 5. Demand was 1.2 times the offer compared to 1.1 times at the previous sale.

Euro Zone Leading Index Rises

The Conference Board Leading Economic Index for the euro area increased 0.6% in August to 105.3, after remaining unchanged in July. This was the first increase in the index in six months, fueled by good stock market performance and improved business confidence.

The coincident economic index, which measures current economic activity, increased 0.1% to 102.2 in August.

French Confidence Eases

French consumer confidence eased to 85 in September from 86 in August, the statistics office Insee said today.

The indicator for unemployment for next 12 months climbed to 73 in September from 69 in August.

UK High Street Sales Climb

Retailers in the UK reported a slight rise in sales volumes in the year to September, data from a survey by the Confederation of British Industry showed.

In the latest monthly distributive trade survey, covering the first two weeks in September, 33% of the retailers said sales increased from last year in September, and 27% stated that sales had fallen. The resulting balance of +6% was in line with expectations.